HSBC's $2 billion buyback fails to cheer investors as spending surges

HONG KONG/LONDON (Reuters) - HSBC’s (HSBA.L) new chief executive sought to mollify investors with a share buyback of up to $2 billion, as the bank reported on Friday an unexpected 4 percent drop in first-quarter pre-tax profit due to a surge in spending.

Europe’s biggest bank by assets said that this would likely be the only share buyback this year, as CEO John Flint looks to invest instead in the bank’s twin homes of Britain and China in a bid to boost returns.

The bank’s shares fell 2.5 percent in London by 0750 GMT, in a sign of immediate investor scepticism that the bank’s new investments will pay off after years spent focusing on cutting unprofitable parts of the business.

“For us to get to a 10 percent return on equity, we will have to grow the business, it’s very hard to get there just by shrinking the cost base,” Flint told analysts on a conference call.

HSBC also took a surprise $897 million in provisions against expected settlements for past misconduct cases, which it said included a U.S. Department of Justice investigation into its sale of toxic mortgage-backed securities.

The provision is a sign the bank has advanced its talks with the U.S. authority, as it and others including Royal Bank of Scotland (RBS.L) inch towards settling their involvement in the sale of the products during the buildup to the 2007-2008 crisis.

In 2017, HSBC returned a total of $3 billion to shareholders through share buybacks and paid more in dividends than any other major European or American bank, while maintaining its capital buffers as revenue grew.

That came on the back of its restructuring strategy unveiled in 2015, which included boosting its presence in Asia, to turn around performance that had suffered from the consequences of a pre-2008 era of excessive empire-building.

The bank’s pre-tax profit of $4.76 billion for the three months ended March 31 compared to $4.96 billion in the same period a year ago, and was well below the $5.76 billion average of analysts’ estimates compiled by the bank.

The bank’s profit shrank mainly as a nearly 13 percent rise in operating expenses outpaced revenue growth of 5.5 percent. HSBC said the rise in costs was due to investment in its retail banking businesses in its core markets of Britain and China.

HSBC said in Britain it had increased the number of intermediaries that it sells mortgages through from 23 to 30 as it boosts its share of home loans.

Flint plans to double down on HSBC’s “pivot” to Asia and China in particular, despite some setbacks in the plan launched in June 2015. [nL3N1RM3B9]

The main pillar of that strategy is centered around the fast growing Pearl River Delta region in southern China that borders Hong Kong. HSBC seeks to make it its gateway to the world’s second-largest economy.

The bank made over 75 percent of its profits in Asia in 2017.

NO QUICK FIX

The biggest question for HSBC investors looking forward is what strategy Flint will adopt to boost growth after years of restructuring and shrinking.

One of the biggest decisions he will have to make is over HSBC’s perennially underperforming U.S. business, which has been barely profitable in recent years as it suffers from being sub-scale relative to domestic rivals.

Flint said on Friday the bank would not look to acquire a domestic business in the United States to increase its scale there, contrary to media reports earlier this year.

“There is no straightforward inorganic solution, there’s no quick fix,” he told Reuters.